EUROPE FINANCIAL AND ECONOMIC REPORT: March 20th, 2009

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SUBJECT: EUROPE FINANCIAL AND ECONOMIC REPORT: March 20th, 2009

FINANCIAL SERVICES: UPCOMING ISSUES /EVENTS
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Credit Rating Agencies (CRAs):
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1. (SBU) On March 23, the Economic and Monetary Affairs (ECON)
Committee of the European Parliament (EP) is set to vote on the EC's
proposed Regulation on Credit Rating Agencies. The ECON Committee
is expected to broaden the scope of the regulation to cover all
ratings (not just those used for regulatory purposes),and to allow
the endorsement of third-country credit ratings by CRAs registered
in the EU. Committee members are currently divided over whether or
not to also impose the establishment of a system to assess
equivalence of third-country regulatory regimes with the EU regime.
There continues to be disagreement over the structure of
supervision, with some favoring empowering CESR to supervise CRAs
while others prefer that national authorities supervise. After
Monday's vote, formal negotiations between the Parliament, Member
States and the Commission will take place to seek to reconcile
differences in time to allow the EP plenary to vote on the proposal
on April 23.

Informal EUROGROUP / ECOFIN:
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2. (SBU) Eurogroup Finance Ministers will meet on April 3 and the
ECOFIN will meet informally on April 4 in Prague. The meetings will
primarily focus on the recommendations made by the de Larosiere
report.

FINANCIAL SERVICES: RECENT EVENTS:
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EP moves Capital Requirements Directive forward - asks the
Commission to legislate on OTC derivatives market by end-2009:
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3. (SBU) On March 9, the EP ECON Committee approved the Commission's
proposed changes to the Capital Requirement Directives (CRD),but
added a requirement that the Commission propose measures to enhance
the transparency of OTC derivatives markets by the end of 2009.
Amendments which would have subjected non-EU cleared credit default
swaps (CDSs) to higher capital charges were not included, given that
industry has now committed itself to clear CDS trades in the EU.
The ECON Committee maintained the original proposal's provisions to:
require banks to keep an interest in the instruments which they
securitize (at least 5%),limit large exposures and establish
mandatory colleges of supervisors for all cross-border financial
institutions.

Proposed regulation of hedge funds and private equity to be
announced April 21:
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4. (SBU) David Wright, deputy head of the Internal Market
Directorate with authority over financial market regulation,
announced that the Commission is set to unveil a legislative
proposal to regulate hedge funds and private equity on April 21.
Mr. Wright indicated that the instrument of choice will be a
Directive, ending earlier speculation that a less binding instrument
may be used. The Commission reportedly will publish a draft policy
on remuneration in the financial sector alongside the draft
directive on hedge funds and private equity.

UKFSA's Turner recommends a pan-European supervisor:
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5. (SBU) On March 18, 2009, the UK Financial Services Authority
(UKFSA) published the Turner Review of global banking regulation.
The Review recommends implementing a number of changes, of which the
key ones are:
--Reforming the European banking market, combining a new European
regulatory authority and increased national powers to constrain
risky cross-border activity;
--More and higher quality bank capital;
--Counter-cyclical capital buffers;
--Regulation of Credit Rating Agencies; and,
--Remuneration policies discouraging excessive risk-taking.

ECONOMICS / FINANCE: UPCOMING ISSUES / EVENTS
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G-20 Leaders Summit (London):
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6. (SBU) On April 2, the G-20 leaders will meet in London. Leaders
are expected to agree to: increase the resources of the IMF, enhance

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the cooperation between IMF and FSF in identifying systemic risks,
and commit to keep markets open.

ECB rate-setting Governing Council meeting:
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7. (SBU) On April 2, the ECB Governing Council will meet to discuss
a possible further cut to ECB interest rates, and to evaluate recent
worsening economic data. After Wednesday's announcement by the U.S.
Federal Reserve that it will increase its balance sheet through the
purchase of U.S. government securities, pressure is rising for the
ECB to follow suit. However, the ECB has been reluctant to
explicitly adopt quantitative easing.

ECONOMICS / FINANCE: RECENT EVENTS:
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EU leaders urge Member States to deal rapidly with impaired assets,
agree to spend 5bn on energy and broadband programs, and double the
facility for balance of payments assistance:
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8. (SBU) On March 20, the European Council called on Member States
to act quickly, and in a coordinated manner, to deal with impaired
assets on the basis of the Commission's recently proposed
guidelines. Leaders noted that the implementation of the European
Economic Recovery Plan (EERP) has shown good progress, and though
they believe that its size is sufficient to generate new
investments, boost demand and create jobs, they agreed to allocate
5bn of unspent funds from the 2008 budget for energy and broadband
projects. They reaffirmed the EU's strong commitment to ensuring
long-term sustainability of public finances, and agreed to double
the ceiling of the support facility for balance of payments
assistance to 50bn. Leaders committed to provide a 75bn loan to
the IMF and called for a doubling of IMF resources.

EU leaders agree on common approach for the G-20 summit:
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9. (SBU) EU leaders agreed to emphasize the following key points at
the upcoming G-20 summit:
--Better regulation for financial markets: All systemically relevant
financial markets, products and participants (including hedge funds,
CRAs and credit derivatives) should be regulated and supervised,
counter-cyclical measures should be introduced and colleges of
supervisors established for all major cross-border financial
institutions. All regulation should be backed by effective,
proportionate and dissuasive sanctions.
--Coordinating fiscal stimuli: Recovery plans consistent with
longer-term objectives should be coordinated, implemented swiftly
and reversed in an orderly manner once the recovery takes hold.
Priority should be given to restoring credit markets and avoiding
protectionist measures.
--Strengthening crisis management at global level: IMF resources
should be doubled, and collaboration between the IMF and the FSF
should be enhanced to identify systemic risks.

Sarkozy and Merkel urge the EU to focus on a new global financial
architecture:
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10. (SBU)In a joint letter sent on March 17 to the Czech Presidency
and to the President of the European Commission, Chancellor Merkel
and President Sarkozy reiterate what they see as the urgent need to
reform the financial system. "The top priority is building up the
new global financial architecture". They call for a European
regulatory framework, based on the recommendations from the de
Larosiere Group, and propose to underline the commitment of the EU
Member States not to raise new obstacles to trade, while calling for
the rapid conclusion of the Doha Round.

FSF and Basel Committee announce membership expansion:
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11. (SBU) On March 11-12, the Financial Stability Forum (FSF) met in
London to discuss the risks and vulnerabilities in financial
markets, how to address them and the policy options going forward.
They also agreed to expand the FSF's membership to include:
Argentina, Brazil, China, India, Indonesia, Korea, Mexico, Russia,
Saudi Arabia, South Africa, Turkey, Spain and the European
Commission. In parallel, at its meeting on March 10-11, the Basel
Committee on Banking Supervision (BCBS) agreed to expand its
membership to include: Australia, Brazil, China, India, Korea,
Mexico and Russia.

EU employment decreases as producer price index falls:
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12. (SBU) Both Euro area and EU employment fell by 0.3% in the
fourth quarter of 2008 compared with the previous quarter. Over the
whole of 2008, employment grew by 0.8% in both areas, compared with
+1.8% in 2007.


13. (SBU) In January 2009, the industrial producer price index fell
month-on-month by 0.8% in the euro area and by 0.6% in the EU27,
after falling by 1.5% and 1.7% respectively in December 2008.
Compared with January 2008, industrial producer prices fell by 0.5%
in the euro area and 0.2% in the EU27.
MURRAY